Out-Law News 2 min. read

'Second charge' mortgage regulation to be tightened as part of FCA's approach to new mortgage credit rules

'Second charge' mortgages, which allow consumers to borrow against the value of their home, in addition to an existing 'first charge' mortgage, are to be brought within the existing regime for regulated mortgage contracts, the UK's Financial Conduct Authority (FCA) has announced.

The proposal is included in the FCA's consultation paper 14/20, Implementation of the Mortgage Credit Directive and the new regime for second charge mortgages. Second charge firms, which currently fall within the FCA's consumer credit regulatory regime, would have to comply with stricter rules governing affordable lending, advice and dealing with payment difficulties if the changes are implemented as planned.

"We recognise that second charge mortgages are beneficial for some customers but we are concerned that consumers can be put at risk by poor sales practices and ineffective affordability assessments," said Christopher Woolard, the FCA's director of policy, risk and research. "Given the risk of consumer detriment, we want to embed good practice and we believe that applying our mortgage rules is the best way to do this."

The FCA intends to bring second charge mortgages into the existing mortgage rules from 21 March 2016, on the same date as the other changes included in the Mortgage Credit Directive take effect.

A second charge mortgage is a type of mortgage that can be taken by an existing borrower on top of their main mortgage. It allows the borrower to use any equity they hold in their home as security against another loan. According to the FCA, second charge mortgages are often used as an alternative to remortgaging.

The Mortgage Credit Directive was adopted in February 2014 with the intention of creation an EU-wide mortgage credit market with a high level of consumer protection. It introduces harmonised consumer information requirements, principle-based rules and service standards and a consumer creditworthiness assessment. The requirements of the Mortgage Credit Directive apply equally to traditional 'first charge' mortgages and 'second charge' loans.

The FCA said that it would mainly implement the requirements of the directive "through reliance on existing mortgage rules". However, new rules covering product disclosure and annual percentage rate of change will be required to bring them into line with EU requirements. A number of other changes would also be introduced including new knowledge and competency requirements, obligations and extra information requirements for firms dealing in foreign currency mortgages and new levels of professional indemnity insurance.

The new regime would require firms to disclose the annual percentage rate of charge (APRC) and monthly payments should rates rise to the highest point seen in the past 20 years. The directive also introduces a maximum harmonising, pre-contractual disclosure document known as the European Standardised Information Sheet (ESIS) which would replace the UK industry's existing Key Facts Illustration (KFI). Firms will be allowed to continue to use the KFI document until March 2019, as long as they make "certain top-up disclosures", according to the FCA's consultation.

The FCA is proposing to extend its existing Mortgage Conduct of Business (MCOB) rules on affordability to cover second charge firms, while these firms would also be required to apply the same stress tests to borrowers as required by first charge firms. In addition, all sales would have to be advised and customers given information about alternative borrowing options.

"The CP14/20, along with the Treasury's own consultation 'Implementation of the EU Mortgage Credit Directive', is a welcome development as to how both the UK government and regulatory propose to implement and enforce the requirements arising from the Mortgage Credit Directive," said financial services regulation expert John Verwey of Pinsent Masons, the law firm behind Out-Law.com.

"The consultation will be of particular interest to firms currently engaged in second charge lending; not only because it sets out the new FCA rules that they are likely to be subject to, but also the likely timeframe for such firms to apply for and then receive FCA permission to carry out regulated mortgage activities. If they haven't already, second charge firms should now be taking steps to prepare for the new regime," he said.

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